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Congressional Research Service
gammmeInforming the legislitive debate since 1914
February 26, 2024
Tax Credit Transfers and Direct Payments in the Inflation
Reduction Act of 2022
The Inflation Reduction Act of 2022 (IRA; P.L. 117-169)
created or modified 20 energy-related income tax credits.
These credits subsidize clean or efficient energy production
and usage by individuals and businesses.
The IRA also created two credit delivery mechanisms that
extend the full value of IRA credits to organizations with
little to no tax liability. This In Focus explains how these
mechanisms benefit untaxed entities and businesses with
low tax liabilities, respectively.
Dfrect (Cash) Paymnents
Federal business tax credits have traditionally been
nonrefundable, meaning that if a business's credits exceed
its tax liabilities, the business cannot receive the difference
as a refund. For example, if a business owes $4,000 of
income taxes but is eligible for $7,000 of credits, those
credits reduce the business's income taxes to $0. However,
the federal government does not send the business a refund
for the remaining $3,000.
This presents challenges for untaxed entities such as state
and local governments, school districts, and nonprofits.
Because these organizations do not pay federal income
taxes, they implicitly cannot benefit from nonrefundable tax
credits. Lawmakers have at times changed the income tax
code to incentivize certain behaviors (e.g., higher
investment) among businesses and individuals, but
nonprofits and other groups exempt from income tax do not
respond to such incentives. To incentivize clean energy
investments across a wider range of organizations, the IRA
allows certain untaxed entities to receive direct cash
payments of equal value to 12 nonrefundable tax credits:
* the alternative fuel vehicle refueling property credit
(AFVRPC; Internal Revenue Code [IRC] §30C);
* the production tax credit (IRC §45);
* the credit for carbon oxide sequestration (IRC §45Q);
* the zero-emission nuclear power production credit (IRC
§45U);
* the clean hydrogen production credit (IRC §45V);
* the credit for qualified commercial clean vehicles (IRC
§45W);
* the advanced manufacturing production credit (IRC
§45X);
* the clean electricity production credit (IRC §45Y);
* the clean fuel production credit (IRC §45Z);
* the investment tax credit (IRC §48);
* the qualifying advanced energy property credit (IRC
§48C); and
* the clean electricity investment credit (IRC §48E).
Organizations receiving direct payments must file a return
with the IRS at the tax filing deadline (with applicable
extensions). Payments are only issued after returns have
been processed. The untaxed entities eligible for direct
payments are
* any private-sector entity exempt from federal income
taxes, including 501(c)(3) organizations such as
hospitals, private colleges, and think tanks;
* state governments and political subdivisions thereof
(including city governments, county governments, and
school districts) and Indian tribal governments;
* the Tennessee Valley Authority;
* Alaska Native Corporations; and
* rural electricity cooperatives.
Organizations that are not exempt from taxation can also
elect to claim direct payments in place of the credits for
carbon oxide sequestration, clean hydrogen production, and
advanced manufacturing production. They may do so for
five years, starting with the year a facility is placed in
service. This election cannot be made after 2032.
Credit Transfers
Entities not eligible for direct payments may transfer any of
the credits listed in the previous section, with the exception
of the credit for qualified commercial clean vehicles. Credit
transfers occur when one business sells its credits to another
at an agreed-upon price in exchange for cash.
Such transfers hold two potential benefits for firms. First,
businesses can sell their credits for a price between the
credit's maximum value and the business's income tax
liability. For example, if a firm owes $4,000 of federal
income taxes but has a credit worth $7,000, it can sell the
credit to a second firm for $6,000. In this example, the first
firm gains $2,000 (because it pays an additional $4,000 in
taxes but receives $6,000 in cash), while the second firm
gains $1,000 (because it buys the credit for $6,000 but
reduces its taxes by $7,000). Second, whereas traditional](ViewImageLocal?handle=hein.crs/goveokt0001&div=1&collection=&method=preview&ext=.png&size=3)
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